“Ten Commandments” of
Preparing for the Sale of a Business
As an experienced Corporate Development executive, I have seen a lot of new deals surface over the last 6-12 months. While other businesses are struggling, our mergers and acquisitions (M&A) advisory firm is experiencing continued double-digit growth. Why? Buyers with strong balance sheets are viewing the recent economic instability as a buying opportunity of the century. Smaller sellers, with potentially weaker balance sheets and less cash on hand to weather the storm, are looking for options, including in most cases, a liquidity event in the form of a sale of their business. As we meet with business owners, we would urge them to consider the 10 items below as a rough guide in preparing his/her business for sale.
I. Thou shalt … start early, assemble the team and commit to the process. Starting one month or two before your expected closing, will result in the buyers perception of a fire sale, which will rarely result in an acceptable offer for the seller.
II. Thou shalt … stay focused on the business and keep your eye on the ball. The last thing that you want to show is a down sales quarter, while trying to sell your business. Allow your advisors to sell the company while you remain sharply focused on items such as sales, customer service and inventory reduction.
III. Thou shalt … manage cash, manage cash and manage cash, again. Sorry for the triple play, but owners that are hyper-focused on their daily cash sheet, can command better multiples when selling their company.
IV. Thou shalt … consider the concept of continuous pruning and continuous hiring. There are always good people to hire and usually some underperformers to trim. Many successful businesses constantly display a help wanted sign. Most buyers view this as a position of strength in the seller’s leadership team.
V. Thou shalt … make valuation-driven decisions. Adopt a philosophy that many decisions can be made based on the potential impact on future corporate valuation. For example, when deciding between two new offerings, choose the one which provides the potential of longer term contracts, recurring revenue sources, service contracts, etc… As a rule of thumb, service businesses sell for less than 1X of revenue and contracted-recurring revenue businesses can sell for 2-5X of revenue or more.
VI. Thou shalt … guarantee that one owns the intellectual property (IP) that they are selling. Ensure that all of your employees and contractors have assigned the IP and you possess clear documentation that supports your ownership of all inventions, ideas and innovations. This is typically one of the first items on a buyers due diligence checklist.
VII. Thou shalt … clean up all shareholder issues and avoid waiting for the due diligence process to settle any 20 year old family feuds. Although this sounds obvious, it is commonly an issue that causes concern for most buyers and tends to quickly ramp-up the legal bills as the lawyers scramble to repair the mistakes and disputes of the past.
VIII. Thou shalt … perform a basic valuation early in the process to set expectations. Don’t wait for the buyers Letter of Intent (LOI) to begin the discussion with the other shareholders. Valuation processes can range from a quick review of on-line deal databases to a more formalized certified valuation analyst (CVA) approach concludes in a 30-50 page report.
IX. Thou shalt … perform a legal corporate tune-up. Do you know where your corporate book is? Have the shares been issued and cataloged? Have the major decisions been documented and minutes added to the corporate book? Is there a clear equity ownership trail defined in the corporate book? Sorry for the simple questions, but most the answers to these for privately-held businesses are NO. Call your lawyer today and schedule this proactive tune up project. You will likely save a bundle of cash by avoiding the reactive scramble during the buyers due diligence process.
X. Thou shalt … assemble all paperwork. In two simple words, get organized! Corporate documents, contracts, reviewed financials, tax returns, employee folders, product information, etc… are part of every buyer’s favorite due diligence checklists. Be prepared and start making PDF copies early.
James R. Brennan is Head Coach of VirtualCDO, a Long Island firm that delivers both Corporate Development Officer and M&A advisory services. Jim can be reached at 631-446-4400 x501 or Brennan@VirtualCDO.com
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